econ: From Hayek -> Hicks -> Arrow

“I can date my own personal ‘revolution’ rather exactly to May or June 1933. It was like this. It began . . with Hayek. His Prices and Production is one of the influences that can be detected in The Theory of Wages; it could not have been otherwise, for 1931 was a Prices and Production year at the London School of Economics . . I did not in fact find it all easy to fit in with my own ideas. What started me off in 1933 was an earlier work of Hayek’s, his paper on ‘Intertemporal Equilibrium’, an idea which I found easier to reduce to my preferred (Paretian or Wicksellian) pattern.” (John Hicks, The Theory of Wages, 2nd Edition,1963, p. 307)

“.. it was from Hayek that I began [the breakthrough essay "Equilibrium and the Cycle" (1933), the original beginnings of Hick's influential work on the topics of intertemporal equilibrium, monetary theory, and trade cycle phenomena] “. (John Hicks, Money, Interest and Wages, Cambridge: Harvard U. Press, 1982, p. 28).

“There were four years, 1931-1935, when I was myself a member of [Hayek's] seminar in London; it has left a deep mark on my thinking.” (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 97).

B. Ingrao & G. Israel, “Hicks elaborated the concept of temporary equilibrium, perhaps the most original contribution of Value and Capital, following the path laid down by Hayek and the Swedish school.” (B. Ingrao & G. Israel, 1990, p. 239)

“Hayek was making us think of the productive process as a process in time, inputs coming before outputs ..”. (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 359).

“I did not begin from Keynes: I began from Pareto, and Hayek (footnote 10: There is evidence for this, in the paper ‘Equilibrium and the Cycle’) ..”. (John Hicks, Classics and Moderns, New York: Basil Blackwell, 1983, p. 359).

Much of Hicks can be understood as an attempt to cram the insights of the Menger-Bohm-Bawerk-Weiser-Hayek research program in capital production/equilibrium theory into a British/Marshallian reconception of Walras/Pareto. It didn’t really work. But it was enormously influential. Kenneth Arrow was among those inspired by Hicks (note well that, contra Arrow, Hicks is not an adequate lens for reading Hayek — it’s easy to guess that Arrow as a grad student wasn’t competent to understand Hayek because Arrow really had no background in the work of Menger, Bohm-Bawerk or Wieser.):

When I enrolled as a student in the Economics Department at Columbia (1941), I was assigned a desk in the library stacks near the economics book collection. As is my wont when placed in the neighborhood of books, I immediately started browsing and ran across a work by an economist whose name I had never heard mentioned, J.R. Hicks’s Value and Capital (1939). As apparently happened to other like-minded economics students (e.g., my good friend, Frank H. Hahn) at that time, it gave me a powerful orientation to economic analysis. It showed how the techniques of static analysis (already familiar to me from Hotelling’s course but expressed with more verve and style) could be applied to events unfolding in time. Savings and investment could be analyzed using the same tools. If the reader thinks this is obvious, I recommend that he read the controversies over capital theory, as exemplified by the papers of Frank Knight (1936) and Friedrich von Hayek’s book (1941) and try to find out, as I tried then, what in the world were the questions being debated. Hicks had a simple approach: Decisions on commodity consumption and production today are made jointly with consumption and production in the future. Therefore, simply put a time subscript on commodities; use the static formalism with the enlarged commodity space. (To be fair, after reading Hicks, one can understand that Hayek was saying much the same, but I defy anyone to learn that from reading Hayek alone.)

Of course, Hicks’s s reformulation did not end the difficulties in theories of savings and investment; rather, it enabled one to understand what they were. In brief, as Hicks explained, the problem was the nonexistence of a full set of futures markets. There were a few commodity futures markets, and, more importantly, there were markets for credit. As Hicks emphasized, the nonexistent futures markets were replaced in the calculations of firms and households by expectations, and the resulting supply and demand behavior determined “temporary” equilibrium prices and allocations on the current and existing futures markets. As Hicks showed, one consistent set of expectations was the equilibrium set that would have been obtained if all markets existed (what later became known as “rational expectations”) …